October 14, 2013

The Shutdown is Coming to an End—With a Win for Lobbyists
The tea party's gift to K Street

Beautifully done, Tea Party Republicans. It’s increasingly looking as if the one major piece of flesh that the congressional GOP may be able to extract from Democrats as a result of the latest grass-roots insurgency is…a huge gift to loathed K Street.

In negotiations to raise the debt ceiling and reopen the government, it has emerged in recent days that the largest likely concession to Republicans is a two-year delay in the 2.3 percent excise tax on the medical device industry that was included in the Affordable Care Act as one of several assessments on various health care sectors that stood to gain more business as a result of the law and, the logic went, could therefore be expected to chip in toward the cost of expanding coverage. Other reports say that Democrats are still holding off on this point, demanding that Republicans find some corporate tax loopholes to close to make up the lost revenue from the medical device tax, about $3 billion per year. Huffington Post is reporting that, at the very least, Democrats are offering to guarantee that the tax will be on the table in the next round of budget negotiations in the weeks ahead.

Either way, it’s awfully telling that it’s come down to this bargaining chip. I’ve spent plenty of time over the past few years talking with people at the conservative grass roots, and am pretty sure that none of them broached as one of their burning issues the plight of big medical device manufacturers, companies that include underdogs such as Johnson & Johnson, Siemens and GE Healthcare. No, the push to repeal the medical device tax was born not in the Wetumpka Tea Party, but rather in the well-appointed offices of lobbyists such as Evan Bayh, the Indiana Democrat who left the Senate saying he had had it with Washington and was going back home to teach college to young Hoosiers, but who somehow instead ended up working at lobbying giant McGuireWoods, where he gave a big boost to the medical device tax repeal movement with a Wall Street Journal op-ed column in September 2012 declaring that the tax would kill jobs and “stifle critical medical innovation in the industry that gave us defibrillators, pacemakers, artificial joints, stents, chemotherapy delivery systems and almost every device we depend on to save lives.” (A tag line to the piece noted demurely that Bayh is a “partner at the McGuireWoods law firm, which represents several medical-device companies.”)

And it’s not just Bayh and McGuireWoods. A dive into the database of lobbyist-disclosure filings shows what a big source of business the country’s biggest medical device and equipment makers are for K Street. To cite just a few examples: During the past couple years, AdvaMed, the main industry association, has been paying quarterly fees of $50,000 to Capitol Hill Strategies, $30,000 to DLA Piper, $50,000 to Kountoupes/Denham, $50,000 to Ogilvy, and $70,000 to Tarplin, Downs & Young. Separately, device maker Medtronic is paying Brown Rudnick $50,000 quarterly, Boston Scientific is paying the same to the Alpine Group and Covidien is paying $80,000 per quarter to Advanced Strategies, plus another $30,000 quarterly to Akin Gump.

Some of these lobbyists are representing the industry on matters other than the device tax, but the issue pops up again and again in the lobbying forms as a point of focus. And if the industry has to settle for a two-year delay of the tax rather than full repeal, it is of course all the better for Bayh et al: the companies will need to keep paying them for at least another two years to try to stave the tax off for good. (Similarly, punting the question of whether to keep the tax until the next round of budget negotiations is even better for lobbyists than having the question settled this week.)

This outcome would serve as something of a clarifying moment for all of those pundits wondering of late why it is that the business lobby hasn’t tried harder to tamp down the Tea Party insurgency its campaign contributions have helped fuel. These pundits assume that there is a massive disconnect between the aims of the two wings of the Republican coalition, that their interests are deeply at odds. Well, no, it won’t be good for Wall Street if Ted Cruz leads us to a national credit default. But the medical device tax is just the latest example of big business doing just fine, thank you, as a result of allegedly populist uprisings on the right. The Chamber of Commerce may know what it’s doing, after all.

Now, it should be noted that the industry’s victory on the tax, should it come, will not be owed only to Bayh’s new colleagues on K Street, but also to Bayh’s former colleagues in the Senate Democratic caucus. The push to repeal the tax has been given a bipartisan veneer by the support of several liberal Democrats from states with large numbers of device manufacturers, such as Minnesota’s Al Franken and Amy Klobuchar and, yes, Elizabeth Warren of Massachusetts, who came out for repeal of the tax during her race last year against Scott Brown (a strong repeal proponent) and did not care for it at all when I asked about this stance on the trail.

The standard line against the tax is that it is stifling growth in a successful American manufacturing sector, especially among smaller device makers, and threatening to send business overseas. One problem with this line is that some small device makers acknowledge it’s wildly overstated. Bob DeAngelis, an executive with Katahdin, told me last year that he didn’t see the tax having much impact on his 150-person Massachusetts firm. “I’m not terribly upset we’re going to have a tax on medical devices. I think it’s overblown. Scott Brown says we ‘shouldn’t be taxing the job creators.’ That sounds great but what does that mean. He’s not talking about me. I’m going to hire based on people buying my product.” Even more adamant was Michael Boyle, the founder of a 55-person firm outside Boston, SDI Diagnostics: “I’m never in favor of paying more tax if it can be avoided. However, it really infuriates me when politicians say that people won't hire because they have to pay a tax. If your business is growing and you need people to help sustain the growth you’re going to hire. It’s nothing but political sloganeering to say that a tax like this is a job killer. It’s not a job killer. It would never stop a responsible manager from hiring people when it’s time to grow the business.” Boyle added: “You bring in millions more people into the health care market and these people are going to use goods and services. My company and every other company, if we operate our business responsibly we are going to share in that. We’re going to give you 10 more in business and take a dollar in taxes, and you mean you won’t hire more people because we’re going to take that one dollar? It makes no sense. It’s nothing but political pandering.”

Even the big companies are a bit more candid about this supposedly lethal tax when they’re speaking among friends. Take Stryker, a large device manufacturer that House Republicans cited at a hearing this past May as a poster child for repealing the tax, saying that the company had been forced to lay off 1,000 workers as a result of the levy, which kicked in at the start of this year. Well, Stryker executives were rather more sanguine in their recent conversations with industry analysts, according to transcripts of quarterly conference calls I reviewed. Executives reported that the company remained on track for annual growth of about 5 percent on quarterly sales of more than $2 billion and said that the cost of the excise tax was coming in lower than expected, about $100 million per year rather than the $130 million they had warned of a year earlier, shaving off less than a percentage point from their profit margins. “We feel really good about that [sales] activity,” said Stryker’s chief financial officer in a Sept. 5 call with analysts. “We absolutely need to be making sure that we are focused on…minimizing the impact of the tax, which I think we have done a good job of already.”

Now, it appears Stryker and the other big device makers, and the lobbyists they're paying six and seven-figure sums to, may be able to keep enjoying the business benefits of expanded health insurance coverage without having to contend with the small price they are paying in exchange for that larger market. And if so, they’ll have Ted Cruz and his fellow anti-Washington renegades to thank for it.

Bravo, fellas—maybe next time you come to Washington to storm the memorials, stop by at McGuireWoods (2001 K Street!) and Evan Bayh can give you a signed replica of a heavily marked-up catheter as a thank you.